G 2 0 M O N I T O R

Trade and the G20

G 2 0 M O N I T O R

Mike Callaghan Peter Gallagher John Ravenhill Mark Thirlwell Brett Williams

N o . 3 - J u n e 2 0 1 3

The Lowy Institute for International Policy is an independent policy think tank. Its mandate ranges across all the dimensions of international policy debate in Australia – economic, political and strategic – and it is not limited to a particular geographic region. Its two core tasks are to:

• produce distinctive research and fresh policy options for Australia’s international policy and to contribute to the wider international debate.

• promote discussion of Australia’s role in the world by providing an accessible and high-quality forum for discussion of Australian international relations through debates, seminars, lectures, dialogues and conferences.

Funding to establish the G20 Studies Centre at the Lowy Institute for International Policy has been provided by the Australian Government.

Lowy Institute Analyses are short papers analysing recent international trends and events and their policy implications.

The views expressed in this paper are entirely the authors' own and not those of the Lowy Institute for International Policy nor of the G20 Studies Centre.

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Contents

Introduction: The G20 must support multilateral trade liberalisation ... 4 By Mike Callaghan

Mega-regional trade agreements and the next transition ... 9 By Peter Gallagher

Global value chains: implications for trade, investment and development policies ... 18 By John Ravenhill

International trade: what can the G20 do? ... 25 By Mark Thirlwell

Australia must exhort the G20 to lead on multilateral trade liberalisation by example not words ... 33

By Brett Williams

Contributors ... 41

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Introduction: the G20 must support multilateral trade liberalisation

Overview

This issue of the G20 Monitor is devoted to the topic of international trade and the role of the G20.

Over the coming months, the Monitor will be covering in detail a number of issues that are, or could be, on the G20 agenda. For example, over the next few months there will be an issue on ‘Financial regulation and the G20’ and another on ‘Development and the G20’. The question we are asking on each issue is ‘where can the G20 add value?’

The G20 and international trade

If one of the main roles of the G20 is to provide a circuit-breaker to intractable international economic issues, then the collapse in 2008 and continuing impasse in the WTO Doha Development Round of multilateral trade negotiations must be a prime candidate for the G20’s attention.

Developments in international trade, the state of multilateral and regional trade negotiations, and the role of the G20, are covered in this issue of the Monitor with papers from Peter Gallagher, John Ravenhill, Mark Thirlwell and Brett Williams.

These papers delve into some of the complex issues associated with trade negotiations.

Keeping markets open is critical to meeting the fundamental objectives of the G20, namely promoting growth and creating jobs. As highlighted in the extensive work of the OECD, trade promotes growth, creates jobs and increases incomes.²

This point was recognised by APEC ministers responsible for trade, when they noted at their meeting on 20-21 April 2013 that they ‘…recognize the importance of international trade as the engine of growth, job creation and source of development.’³

The G20’s record on the standstill – mixed at best.

At their first meeting in Washington DC in November 2008, G20 leaders committed

‘…within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports.’⁴ This standstill on protection was extended at the London Summit in April 2009 until end-2010, renewed for a further three years until end-2013 at the Toronto Summit in June 2010, and extended again at the Los Cabos Summit until end-2014.

1 Director, G20 Studies Centre, Lowy Institute for International Policy.

2 Douglas Lippoldt, ed., Policy priorities for international trade and jobs, OECD, 2012.

3 APEC Ministers responsible for trade, Statement on Supporting the Multilateral Trading System and WTO 9th Ministerial Conference. 2013 Meeting of APEC Ministers Responsible for Trade April 20-21 2013:

http://www.apec.org/Meeting-Papers/Ministerial-Statements/Trade/2013_trade/2013_mrt_standalone.aspx.

4 G20, Declaration: Summit on Financial Markets and the World Economy. 2008.

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But as outlined by Mark Thirlwell, even an assessment of compliance with the standstill on protectionism based solely on the reports commissioned by leaders from the WTO, OECD and UNCTAD is a mixed one. There has been a steady accumulation of trade restrictions by G20 members, although as Thirlwell points out, there has been no widespread retreat to protectionism. This is an area where the G20 has claimed credit. However, as Thirlwell also notes, other trade policy assessments are not as sanguine as the official product, pointing to a rise in ‘murky protectionism’ in the form of non-tariff barriers that are not subject to multilateral trade rules.

G20’s record on Doha – poor

In terms of concluding the Doha Development Round, the G20 has failed to show leadership.

At various summits, leaders committed to completing an ‘ambitious and balanced’ conclusion to the Round, and trade representatives were instructed to use ‘all negotiating avenues’. At the Seoul Summit, leaders said that they recognised that 2011 was a critical window of opportunity and they were now entering ‘the end game’. But this sense of urgency and commitment did not appear to be transmitted back to the trade negotiators in Geneva, and rather than ‘ending the game’ with a successful conclusion, the Doha Round appears to have collapsed in failure. The G20 has conspicuously and repeatedly failed to deliver on Doha, damaging its credibility on trade policy.

The rise of mega-regional trade agreements

Peter Gallagher points out that trade agreements signal the commercial policies of governments. Similarly, not concluding an agreement is also a signal. It signals that governments are withdrawing from ambitious attempts to open world markets in favour of preferential trade arrangements, particularly mega-regional agreements. He suggests that the G20 should read with disquiet, if not alarm, the fact that the two most prominent members of the forum, the United States and China, have signalled a continuing divergence in their trade objectives and are pursuing separate discriminatory mega-regional trading agreements.

Gallagher believes that the mega-regional trading agreements being pursued by the United States – the Trans-Pacific partnership (TPP) and the Trans-Atlantic Trade and Investment partnership (TPIP) – threaten to divide the global trading system into two large, although non-exclusive, regions defined by the discriminatory preferences in the US led agreements.

Those discriminated against will include all the major emerging markets including China, India, Indonesia, Russia, Brazil and Nigeria (although China has recently indicated that it is considering joining the TPP.)

Brett Williams provides a summary of the political problems associated with multilateral trade liberalisation and how such influences have resulted in the proliferation of discriminatory trade agreements.

Implications of global value chains

John Ravenhill outlines the change that has been taking place in international trade with value chains being the principal engine of globalisation. The fragmentation of production has dramatically transformed the structure of international trade, integrating developing economies into manufacturing networks. International trade increasingly represents trade in components as part of the production of a product. With global manufacturing, goods are now

‘made in the world’ rather than in a single country. Ravenhill points out that one implication

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of the rise in global value chains is that traditional trade statistics, which are measured on a gross basis rather than value-added, are obsolete. As such, much of the concern over bilateral trade imbalances is clearly misplaced. Furthermore, Thirlwell points out that with economies so interconnected and integrated, traditional trade policy is no longer an effective tool to assist domestic industries, and that traditional understandings of trade policy based on these older approaches are similarly obsolete. He also notes that the same applies to the WTO, which, distracted by Doha, has not kept pace with the need for new rules governing the intertwining of trade, investment, intellectual property and services. In short, the rise of integrated global value chains require a change in the traditional mercantilist approach to trade, which views exports as ‘good’ and imports as ‘bad’.

Where next for the multilateral trading system?

The Doha Round is at an impasse. Some would say it is dead. But does this also apply to the overall commitment of WTO members to the multilateral trading system?

A decisive milestone may well be the outcome from the WTO 9^th Ministerial Conference (MC(9)) that will take place in Bali from 3-6 December 2013. The approach to MC(9) is meant to reflect recognition that because not all the elements of the Doha Round can be concluded simultaneously, different negotiating strategies will be employed in an effort to advance areas where progress can be achieved. The areas identified for delivery at MC(9) include trade facilitation (an agreement on reforms to streamline the movement of goods across borders), agriculture (including the controversial issue of whether building food stockpiles is a form of subsidising agriculture) and specific issues relevant to least developed countries (LDCs – including implementing an agreement for granting duty-free and quota- free access to goods originating from LDCs, and special and differential treatment for LDCs which exempts them from some WTO rules).

A successful outcome of the Bali WTO trade ministers meeting would mean that there was still life in the multilateral system – and in the WTO as a negotiating forum for trade liberalisation. But the prospects are not promising. In a statement released on 2 May 2013, the current WTO Director-General, Pascal Lamy, warned that the current pace of work was insufficient to deliver outcomes at MC(9) in Bali.⁵

The view of business

Under the Russian G20 presidency, the B20 (business leaders) task force on trade submitted the following preliminary recommendations for the St Petersburg G20 summit in September 2013:⁶

• Extend the deadline for standstill and monitoring protectionism until 2015, further strengthen the monitoring system and explore incentives to roll back protectionism.

• Commit to the WTO Trade Facilitation Agreement and finalise the text of the agreement by the September G20 summit and conclude the final agreement at the Bali Ministerial in December.

5 Pascal Lamy, Director-General Pascal Lamy’s statement: informal trade negotiations committee meeting at the level of head of delegation. WTO April 11 2013:

http://www.wto.org/english/news_e/news13_e/tnc_infstat_11apr13_e.htm.

6 B20-G20 Partnership for Growth and Jobs, Recommendations from Task Force. Moscow, 2013.

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• Encourage the leadership role in establishing principles to guide the design of preferential trade arrangements with the aim of making them compatible with and complementary to WTO rules.

What can the G20 do?

The recommendations from the B20 are similar to a number of the proposals made by Thirlwell, Gallagher, and Ravenhill as to what the G20 can do to support the multilateral system. Their proposals include:

• Place international trade at the heart of the G20’s commitment to deliver economic growth and employment.

• Extend, upgrade and refine the standstill agreement on protectionism to cover WTO- consistent measures of protectionism (non-tariff barriers).

• Harvest what can be saved from the Doha Round by reaching agreement on trade facilitation, duty-free and quota-free access for LDC’s goods, phase out farm export subsidies, reform the WTO dispute settlement system, and introduce new disciplines on food export controls.

• Encourage the WTO to bring the trade policy agenda into the 21^st century, recognising the importance of services trade and global supply chains.

• Recognise the scale of the proposed/pending mega-regional trading arrangements and seek to negotiate the provisions of the mega-regionals with a beforehand view to their global application. Positive provisions in the mega-regional arrangements are likely to set global standards which would be adopted by countries outside the region.

• Advance plurilateral agreements within the WTO, whereby subsets of countries with ambitious trade agendas could forge ahead with agreements on certain issues and at the same time allow those countries with reservations to stand aside.

Williams advocates that G20 members take small, tangible steps towards non-discriminatory trade liberalisation. His argument is that if there is no multilateral agreement to reduce trade barriers, and the trend is towards discriminatory regional arrangements, then there will be no mechanism to move towards less rather than more discrimination. As such, he believes the G20 should take incremental steps to reduce margins of preference and continue to gradually eliminate discrimination in international trade.

Is there a need for a multilateral investment agreement?

Ravenhill questions whether there is also a need to negotiate a global treaty on foreign direct investment. The fragmentation of production processes, which has driven global value chains, is generally thought to be associated with the rise in foreign direct investment (FDI) into developing countries. As such, facilitating FDI is considered an important component of helping developing countries become plugged into global value chains. Accordingly, the establishment of a multilateral investment agreement which would regulate certain aspects of FDI and standardise investor protection is often presented as assisting developing countries access to FDI.

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The B20 supports the development of a ‘G20 investment agreement’. The preliminary recommendation to leaders from the B20 investments and infrastructure working group was for G20 members to reinforce cross-border investment activity by agreeing on a set of recommendations governing a G20 multilateral investment framework and setting minimum standards to be endorsed by all G20 governments.

Ravenhill, however, says that the relationship between FDI and global value chains is not straightforward. Significant numbers of global value chains are associated with little or no foreign direct investment. Rather than a multilateral agreement, there has been a proliferation of bilateral investment treaties (BITs), and many of the recent bilateral trade agreements have chapters on investment. The argument can be made, however, that the large number of BITs (the average country has more than 35 international investment agreements)⁷ demonstrate the need for a multilateral investment agreement. As things currently stand, a potential investor seeking to locate a production facility overseas would have to examine a vast number of bilateral agreements. Ravenhill points out that previous attempts to negotiate a global investment treaty foundered on conflicts over the balance of rights and responsibilities and it is unlikely that new attempts will be any more successful.

It comes down to leadership

Any trade agreement, be it strengthening and extending the standstill on protection or harvesting components from the Doha Round such as a Trade Facilitation Agreement, will be very difficult to conclude. But if the G20 is to be the premier forum for international cooperation, then one of its highest priorities should be in maintaining the multilateral trading system and the multilateral approach to trade liberalisation. Previous G20 summit declarations have contained rhetoric on trade, but this has not translated into tangible action.

To breathe life into the multilateral trading system will require a focused effort by G20 leaders.

7 Anders Aslund, The world needs a multilateral investment agreement. Policy Brief, Number PB13-01.

Peterson Institute for International Economics, January 2013.

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Mega-regional trade agreements and the next transition

Summary

All members of the G20 must rely on the policy guarantees of the WTO to secure their trade policy interests during the coming global economic transition in which China will displace the United States as the world’s largest economy. But both China and the United States (the G-2) have chosen to pursue regional trade strategies that ignore each other and the WTO (except as a means of managing trade disputes). This is more harmful to the future of the multilateral trading system than the collapse of the Doha negotiations. This paper evaluates options for restoring the momentum of trade negotiations in the WTO that will maintain the credibility of the multilateral system, engage the interests of the G-2, and minimise the divergence of interest that led to the collapse of the Doha negotiations. Specifically, G20 economies should seek to translate modalities for the liberalisation of goods, non-tariff measures (NTMs), and services restrictions in mega-regional agreements to agreements in WTO. This would be a substantial commitment to the continuing credibility of the multilateral system during a period of global economic transition.

Alarming signs

Trade agreements signal to both domestic and international agents the direction that a government’s commercial policies will take for some indefinite period. If an agreement contains credible commitments, firms, households and investors will adapt their own expectations and plans quickly, perhaps before the agreements enter into force. This signalling process accelerates and smooths adjustment by ensuring that all stakeholders are on ‘the same page’ when the associated domestic reforms are implemented.⁸

Choosing not to participate in or conclude a trade agreement is also a signal. That is why the collapse of the Doha negotiations in December 2008 was so resonant. It appeared to signal that governments were withdrawing from ambitious attempts to open world markets. Coming at a time when a collapse of confidence in global financial markets was dragging the world economy into a deep recession, the signal seems particularly portentous and gloomy.

Now the global economy is making a slow, uneven recovery with many regions still experiencing weak growth and barely managing their debt burdens, there is again reason to ask what signals governments are sending by their trade negotiation initiatives. The two most prominent members of the G20, the United States and China, whose disagreement in Geneva in 2008 finally pulled down the rickety Doha negotiations, have now chosen to signal a continuing divergence in their trade objectives that the G20 should view with disquiet, if not alarm.

The discriminatory mega-regionals now being actively pursued by the Obama administration, especially, threaten to divide the trading system into two large, although non-exclusive, regions defined by the discriminatory preferences in the US-led agreements. One bloc will

8 China's entry into the WTO, and the arduously negotiated policy changes it agreed to embody in its Protocol of Accession is a classic case of such policy signalling. By far the most important audience for the Protocol was the domestic political economy, not foreigners. But China's is only the most prominent example among many.

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include Europe, Japan, the ‘British offshoots,’⁹ Mexico, Peru and Chile. Those discriminated against will include all of the giant emerging economies including China, India, Indonesia, Russia, Brazil and Nigeria.¹⁰

In view of the continuing changes in the distribution of world trade and production – characterised by the relative dynamism of the emerging economies and the slowing of the rest – this policy seems foolish, at best. As the centres of economic ‘gravity’ move over the next twenty years, only the multilateral system will provide a universal guarantee of, and enforceable rights to, non-discriminatory treatment of trade.

The G-2 talk past each other

On the narrowest construction, the distance between success and failure in the 2008 efforts to drive the Doha Round to a conclusion was the distance between the United States’ and China's negotiating positions. The USTR, Susan Schwab, believed the Administration could win Congressional approval for a 'package' deal that included some – rather small¹¹ – cuts in US farm subsidies plus some additional concessions from China on cuts in non-agricultural protection. China demurred: it had at least four years to run under the stiff (and even prejudicial) transitional terms of its Protocol of Accession to WTO that brought its commercial policies in line with the most liberal standards for a low-medium-income developing economy.

Since then, neither in the United States nor China is there any indication that preferences have changed in favour of multilateral market-opening initiatives. The Obama administration has chosen to peg the trade policy goals of its lame-duck second term to two regional ‘mega- agreements’ – the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) – that spin the words ‘free trade’ out of the title. Each has strong marquee value as a foreign-policy initiative and in combination seem geographically comprehensive.

But the most remarkable aspect of President Obama's trade policy initiatives is that they avoid constructing any bridge to the United States' most significant trading and investment partner. China is already the United States' top supplier of imports and third largest export market and by far the fastest-growing foreign direct investor. China is also very likely to be the world’s largest economy within the next twenty years, strongly suggesting that the United States would want to have every opportunity to build clear access to Chinese producers and consumers.

At best, the United States policy might be explained as a response to the fact that China is presently showing no signs of interest in building that bridge either. But that characterisation would be more generous than necessary to the Obama administration, which seems to have structured its TPP participation in a way that discourages Chinese accession to the negotiations. Since 2011 when the United States became involved in the negotiations, the agreement seems to have been structured as a 'hubs and spokes' agreement of smaller

9 See Angus Maddison’s historical grouping of United States, Canada, Australia in Angus Maddison, The world economy: historical statistics, OECD, 2003.

10 Australia, New Zealand and Japan, happily, may be able to ‘straddle’ the two blocs, by participating both in the US-led bloc and the RCEP that will include China (see below).

11 Will Martin and Aaditya Matoo, The Doha Development Agenda: what's on the table? The Journal of International Trade & Economic Development 19 (1) 2010, pp 81-107.

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economies with the United States as opposed to a plurilateral structure – like the European Communities, for example – where all parties have uniform rights and obligations.¹²

The subsequent accessions of Canada, Mexico and Japan to the negotiating group confirm this US-centric format, since each followed a bilateral negotiation with the United States in which terms for joining the TPP that reflected US objectives were agreed upon. Although it is no surprise that the United States and other TPP parties would want all those joining the negotiation to pre-commit to the general objectives (e.g. ‘free trade’, innovative agreements on non-border regulations, simplified rules-of-origin etc.) it is easy to understand why China would be as unwilling also to meet preconditions set by the United States for its participation in a region-wide, nominally plurilateral, framework.

Not surprisingly, the United States TPP initiatives have been widely perceived in China as hostile to China's interests and to its role in the Pacific region.¹³ Supporters of the President's program boastfully describe participation in the mega-regionals as a test distinguishing

‘leaders and laggards’ in world trade.¹⁴

For its part, China too has taken some – more tentative – steps in the construction of a network of regional trade relationships that exclude the United States. For an economy of its size, China has ratified relatively few bilateral agreements; it has a 'partial coverage' regional agreement with ASEAN, and FTAs with three relatively small Pacific economies (Chile, Costa Rica, and New Zealand). In 2012, China agreed to join talks on a 'mega-regional' agreement – the Regional Cooperative Economic Partnership – led by the ASEAN countries and that includes Japan, Australia and India but does not extend to the United States. The RCEP has been described by the official Chinese media as 'countering' the TPP.¹⁵

To appreciate why this mutual disengagement by China and the United States is bizarre and worrisome, it is useful to take a step back and view it in the perspective of the past twenty, and the next twenty, years.

Transition in the global economy

Even if the world tomorrow were likely to be much like the world today it would be disquieting that the United States and China should have chosen trade agreement agendas that further embed the misalignment that stymied the WTO. Both have actively employed the WTO dispute settlement process to define the margins of their trade relations: 8 of the 11 complaints brought by China have been against the United States and 15 of the 30 cases in which China has been the respondent have been US complaints. But to rely for management of disputes on the provisions of the very trade framework that their divergent policies have weakened seems like a recipe for instability.

12 It is impossible to verify the configuration of the market access deals because the Governments negotiating the TPP have decided to keep all drafts confidential.

13 Ann Capling and John Ravenhill, The Trans-Pacific Partnership: an Australian perspective. 2013:

http://www.alliance21.org.au/themes/trade-and-investment.

14 Daniel Altman, Trade coalitions of the willing. Foreign Policy, March 18 2013:

http://www.foreignpolicy.com/articles/2013/03/18/trade_coalitions_of_the_willing_barack_obama.

15 Weijiang Feng, Going beyond the free trade agreements and establishing a new East Asian economic order.

Xinhua News (English), 9 November 2012: http://news.xinhuanet.com/english/indepth/2012- 09/11/c_131857806.htm.

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In reality, the probability that the distribution of economic power tomorrow will be quite unlike the distribution today elevates ‘disquiet’ to ‘consternation’. Between now and 2030 the centre of gravity of the global economy will move across the Pacific. The new order will be characterised (in ways that are not yet clear) by the dominance of large economies that are not particularly wealthy. China will be the world's largest economy, probably by a substantial margin,¹⁶ and its success will have been secured by the multilateral trading system.

Although there is little sign of it so far, the wealthy economies will eventually have to contemplate the implications of their displacement from the economic dominance they have enjoyed for two or three centuries. A multilateral system that abstracts from pure power, and which was originally designed to safeguard their markets from the exercise of coercion by one of their own number, is now likely to be their best guarantee that the new, emerging, powers will be similarly constrained. So it is all the more worrying that the WTO, on whose provisions all of the G20 rely, is struggling to remain credible in the face of the G-2's embrace of mega-regional agreements and will not be in a strong position to claim their full adherence if their economic interests diverge further during the ongoing reallocation of economic power between them.

Supporting the multilateral system

For the past four or five years, the multilateral system has 'muddled through’; although there has been no obvious deterioration, there has also been little forward momentum and it retains the role of the inevitable trade regime that almost every state has joined or intends to join.

What could the G20 do to ensure that the multilateral framework continues to thrive and that it continues to supply effective guarantees for the future interests of the less powerful wealthy as well as the more powerful middle-income giants?

Regrettably, despite the contribution that the WTO's guarantees have made to its economic achievements, China remains hesitant to participate in collaborative management of a global trade 'commons' that extends across customs borders. China remains attached to a state- centric, 'Westphalian' or 'non-interference' model of the global polity.¹⁷ According to Western analysts,¹⁸ China has little or no interest in the trading system as an international public good, and shares few or none of the liberal economic governance norms that underlie the GATT and WTO and that are reflected in their respective Preambles. Although it has gradually begun to support some moderately revisionist objectives for international institutions intended to redress ‘inequities’, China still conceives of its own responsibilities as ending inside its borders. Accordingly, there is so far no sign, for good or for ill, that China considers leadership in the trading system as a significant or beneficial means of projecting its already considerable trade power.

With little prospect of mutual entente between the United States and China on action to restore vigour to the multilateral trading system, the G20 must seek alternative ways to

16 Even if China's growth were to slow over the next two decades to two thirds of the rate it achieved in the last three decades – 6.6 per cent a year on average compared with 9.9 per cent – it will outstrip the United States in economic size before 2030, see World Bank and P.R.C. Development Research Centre of the State Council, China 2030 : building a modern, harmonious, and creative high-income society. Washington, DC, The World Bank, 2012.

17 Lai-Ha Chan, Pak K. Lee and Gerald Chan, Rethinking global governance: a China model in the making?

Contemporary Politics 14 (1) 2008, pp 3-19.

18 David Shambaugh, China goes global: the partial power. Oxford, Oxford University Press, 2013.

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reinvigorate the multilateral system. But resumption of the multilateral negotiations remains, probably, out of its reach. To avoid a repetition of the Doha debacle, either the agenda for future negotiations must address only those concerns which are shared by all WTO members, or the negotiations must adopt a 'critical mass' approach to decision-making that avoids the clumsy 'Single Undertaking' expectation that all members will participate in every negotiation and abide by every rule.¹⁹ A ‘critical mass’ approach has the advantage of extending the WTO's frontiers – albeit at the cost of accepting free-riders on the plurilateral agreement embodying the results of the negotiation.²⁰

In fact, WTO members have already taken some steps on both of these paths. The negotiations aimed at completing an agreement on Trade Facilitation by the end of 2013 address a multilateral interest that seemed universally shared by members even in 2008 when the rest of the Doha agenda collapsed. Twenty-one members are also exploring services negotiations aimed at extending the Uruguay Round services schedules of commitments on a plurilateral, ‘critical mass’, basis. If these efforts succeed – by no means certain – they will open or improve the operations of valuable markets and provide some evidence of the continuing commitment of members to the system. But they fall short of resolving the divergence of interests. China is participating in the Trade Facilitation negotiations, but not in the proposed Services plurilateral. The United States is engaged in both.

A 'China Round'?

A more ambitious suggestion comes from World Bank economists Aaditya Mattoo and Arvind Subramanian. They urge a comprehensive China Round: ‘a China-inspired agenda – whose aim would in fact be to anchor China, to the maximum extent possible, in the multilateral trading system.’²¹ They suggest multilateral negotiations that would further cut duties to compensate for China's relatively low level of preferential access to goods markets;

significantly improve services commitments – relatively weak in China's 2001 GATS schedule – by cutting barriers to below the level currently prevailing in most WTO economies; clarify rules on foreign direct investments; extend the liberalisation of government procurement; and develop new disciplines giving more secure access to food and energy resources.

19 The meaning of ‘single undertaking’ changed at the end of the Uruguay Round in 1994. What had formerly been a process for managing multi-part negotiations (‘nothing is agreed until everything is agreed’) was transformed by the G-7 into a constitutional requirement that every economy acceding to the WTO must comply with every one of the several dozen ‘core’ WTO agreements (those attached to the 1994 protocol that established WTO). The G-7 insisted that this should be a prior condition on any GATT member’s accession to the new organisation; no partial participation. But the Single Undertaking had a perverse effect. Because a consensus of the full membership is needed to amend or adopt new agreements, it ensures that member economies that are most reluctant to liberalise their market regulations will hold up decisions until they represent no threat to their interests. Contrary to the intention of the G-7, the Single Undertaking now ensures lowest-common-denominator outcomes.

20 Any agreement concluded within the 'precincts' of the WTO must comply with the MFN provisions of GATT and GATS. In other words, the benefits of the agreement must extend universally to WTO members even if they are not among the ‘critical mass’ of members that have agreed to submit to the obligations of the agreement.

‘Critical mass’ means, in effect, accepting ‘free riders’ on the basis that they do not upset the calculus that makes the agreement worthwhile to participants. But the free rides must rankle if they include, for example, China or India. The current 'critical mass' plurilateral agreements, such as the Information Technology Agreement and the Understanding on Financial Services are MFN agreements; China is a member of the former but not of the latter.

21 Aaditya Matoo and Arvind Subramanian, China and the world trading system. Policy Research Working Paper no. 5897. World Bank, 2011.

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These are sensible suggestions. But it seems very unlikely that such a round of negotiations would recommend itself to WTO members unless China itself were to pursue it and to be willing to 'deal' in order to make it happen. While China does not show that level of interest or initiative in the WTO, it would be unrealistic to expect other governments to come forward with unilateral offers.

'WTO 2.0'?

Richard Baldwin has tried to define a zone of convergent interest – for the G-2 among others – in a plurilateral agreement he calls ‘WTO 2.0’²² that would drive 'complex' deepening of trade commitments, especially on investment and intellectual property (IP), among those economies deeply engaged in supply network trade. These topics have already been on the WTO agenda in one way or another, including as parts of the Doha Round agenda (known as the ‘Singapore Issues’) that were abandoned at the Cancún Ministerial Meeting in 2003, so Baldwin is probably right to assess that WTO is not about to pursue them. He observes that the ‘deepening’ of market-integrating rules in these domains is on the agenda of some of the

‘mega-regional’ agreements. But, he argues, the mega-regionals cannot create the kind of broad, quasi-global advances that would most benefit supply-network trade.²³ Accordingly, Baldwin advocates the creation of a ‘WTO 2.0’ to house such agreements, by which he seems to mean a plurilateral, ‘critical mass’ agreement outside the precincts of ‘WTO 1.0’.

It is not clear, however, that China’s interest in supply-network trade would overcome its reluctance (above) to engage in ‘deeper’ regulatory integration so the ‘quasi-global’ character of ‘WTO 2.0’ must be in doubt from the start. It might, in any case, be a self-defeating way to support supply-network trade. The majority of the rules governing trans-border trade are contained in ‘WTO 1.0’. They are even more fundamental to trades that cross multiple borders than the investment and IP issues that Baldwin prioritises.²⁴ Creating a ‘WTO 2.0’

will do nothing to restore support for ‘WTO 1.0’; on the contrary it will signal a loss of confidence in the organisation. But the refinements of a ‘WTO 2.0’ would be useless if the foundations in ‘WTO 1.0’ begin to crumble.

Refactoring the mega-regionals

As described by the participating governments, the objectives outlined for the mega-regional agreements (RCEP, TTIP, and TPP) are to pursue comprehensive and innovative market liberalisation.²⁵ If we accept that they are now inevitably one part of the new trade reality,

22 Richard Baldwin, WTO 2.0: global governance of supply-chain trade. CEPR Policy Insight. Centre for Economic Policy Research, 2012.

23 Especially since none of the mega-regionals includes both of the G-2.

24 The evidence that deeper commitments on IP and investment are required to support supply network trade is not particularly strong; for example, there is no evidence that 'deepening' IP rules beyond basic compliance with e.g. the WTO TRIPS provisions increases FDI flows, see Michele Boldrin and David Levine, The case Against patents. Journal of Economic Perspectives 27 (1) 2013, pp 3-22.

25 For the objectives of the TTIP see, European Commission, European Union and United States to launch negotiations for a Transatlantic Trade and Investment Partnership. 2013:

http://trade.ec.europa.eu/doclib/press/index.cfm?id=869. The objectives of the TPP as at 2011 are outlined by the Office of the United States Trade Representative. Outlines of the Trans-Pacific Partnership Agreement.

November 2011: http://www.ustr.gov/about-us/press-office/fact-sheets/2011/november/outlines-trans-pacific- partnership-agreement. For the brief objectives of the RCEP, see Department of Foreign Affairs and Trade, Regional Comprehensive Economic Partnership negotiations. 2012: http://www.dfat.gov.au/fta/rcep/.

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how can they be made to signal something more positive about the future of the non- discriminatory multilateral system? Would it be possible to provide a path from Regional Trade Agreement (RTA) based reduction and elimination of trade barriers – especially NTMs – to multilateral reduction and elimination of the same barriers on a non-discriminatory basis?

‘Multilateralising’ the provisions of RTAs is a program that, so far, has no subscribers;

despite much talk and enthusiasm for the idea, there has not been a single incidence of a regional trade liberalisation provision being transformed into a multilateral agreement after the fact.²⁶ Also, even if the parties to the RTA are willing to dilute their discriminatory benefits by extending some aspect of their agreement to the rest of the world, the provisions of regional agreements are usually so specific to the regional context that they do not readily translate to the multilateral level.

One distinguishing feature of the mega-regionals, however, is their scale, which to some degree overcomes the problem of regional specificity. Each of the mega-regions includes economies that account for a large proportion of world production and trade. In 2011 the TTIP partners accounted for half of world output and almost one third of world trade; the TPP partners account for about 40 per cent of world output and RCEP participants about 30 per cent of world output in 2011. On account of this scale alone, any positive obligations accepted by the partners of one or other of the mega-regionals is likely to set a globally- relevant standard for trade or related regulation. For example, the proposed Trans-Atlantic Trade and Investment Partnership (TTIP) will address industrial and services standards and professional accreditation differences between the United States and the EU. By virtue of the size of the TTIP region, the adoption of joint or homologated standards by these two would likely set a world standard that could prove attractive on a commercial basis to manufacturing and services firms in many regions of the world, providing the basis for a multilateral (or at least 'critical mass') adoption by countries outside the region. A similar potential may be found in the other ‘mega-regional’ agreements – TTP and RCEP or even the proposed EU- Japan RTA²⁷ – for progress on NTMs in phytosanitary and technical barriers to trade;

accreditation and professional standards barriers to business services; IP protection barriers;

competition policy protection barriers; trade and customs facilitation; and, the scope of temporary protection such as anti-dumping and safeguards.

A second distinguishing feature of the mega-regionals is that they centre on the G-2, with the United States playing a leading role in two of the largest and China being the likely largest participant in the third.²⁸ Seen in a positive light, this polarity offers an opportunity for parsimony in the creation of positive provisions/standards in each of the mega-regionals, greatly enhancing the chance that they might be adopted multilaterally. If the same regulatory provisions or the same or similar standards (or methods for aligning variant national standards) were promoted by the G-2 in their mega-regional negotiations, the ‘playing field’

covered by these agreements would be more level. But early action would be needed to

26 This is not to say that there has been no transmission of ideas between RTAs and the multilateral system: it could be argued, for example, that the inclusion of an innovative provision liberalising services trade in the 1988 Australia-New Zealand Closer Economic Relations Trade Agreement provided some lessons for negotiators of the WTO General Agreement on Trade in Services (1995). But the ANZCERTA agreement, based on a

‘negative list’, is much more comprehensive and much simpler than the GATS.

27 See European Commission, Countries and regions: Japan. 2013: http://ec.europa.eu/trade/policy/countries- and-regions/countries/japan/.

28 Japan, too, will now be a member of both the TPP and RCEP.

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secure such an outcome. By the time the schedules to the agreements are written the opportunity for alignment on trade regulation among the new trading blocs will have disappeared; the ‘multilateralising’ agenda will again fail. The challenge is to negotiate these provisions of the mega-regionals with a beforehand view to their global application.

Could the G20 do something to promote a beneficial alignment between the mega-regional trading blocs? If it is inevitable that these agreements will characterise the trading system in the first half of the 21^st century, the G20 has an interest in pressing its leading members to adopt harm-minimising strategies for their agreements that will minimise mutual discrimination. Specifically – in the language of trade negotiators – they should encourage intra-regional collaboration on ‘modalities’²⁹ for eliminating tariff and tariff-quota protection, for eliminating or minimising non-tariff-measures (including industrial and phytosanitary standards) and for opening services markets (including by advances in mutual recognition or harmonisation of professional standards).

Collaboration among G20 members to pre-align ‘modalities’ does not necessarily mean having the same thresholds, time-frames or trade coverage for the implementation of positive provisions in each of the mega-regionals. Nor does it mean the same outcomes in each agreement. It means only that the same barriers to trade would be liberalised in the same way.

This is useful in negotiations on NTMs and services market restrictions because the impacts of the restrictions themselves resist direct measurement and comparison. In these domains,

‘reciprocity’ in trade agreements is typically defined by the use of the same regulatory modality – say, compliance with the same international phytosanitary standard, or making the same proportional changes to a tariff-quota threshold, or prohibiting the use of certain forms of production support, or agreeing to the access to local enforcement measures for intellectual property protection – without attempting to measure and specify outcomes in different markets.

An ‘intra-regional’ framework adopted by the G20 would aim to provide a consistent framework for use in the future by all WTO Members, but would also provide a basis for minimising inconsistencies between the provisions of mega-regional agreements. A uniform framework of modalities would also facilitate harmonised terms of accession to each of the mega-regionals for economies that are not initial participants. It might, for example, permit a member of the RCEP, such as Indonesia for example, to identify a clear path to membership of the TPP based on a different set of thresholds or time-frames or coverage applied within the same regulatory framework as it had accepted in the RCEP.

29 WTO agreements must be applicable in hundreds of different economies. Accordingly, they typically specify the outcomes to be achieved by members’ trade regulations rather than the content of those regulations, allowing each government a degree of flexibility in the application of their policies and laws. The desired outcomes in any economy from a trade negotiation may depend, however, on pre-existing conditions. For example, governments may be unable to agree to cut all barriers on agricultural imports to the same low level in every market because this would mean that some countries will make no cuts to protection (if their import barriers are already low) and some will make huge cuts to protection (because their barriers are currently high). An agreement along these lines would fail the test of ‘reciprocity’ among WTO members. Governments may, instead, agree to implement cuts that have a similar proportional impact on existing levels of protection in every economy. The way in which the similarity of the proportional cut is determined and implemented is a modality (a method or an approach). Most of the negotiations in WTO trade negotiations are concerned with modalities rather than with e.g. specified levels of protection. Negotiators necessarily focus on modalities when the regulation of interest has outcomes that are difficult to quantify; that means, most NTMs such as barriers to market entry based on product or services standards.

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If the G20 is sufficiently seized of the danger that the mega-regional agreements will fracture the multilateral trading system, there is still time to develop an inter-regional framework of modalities. As at mid-2013, the participants in the TPP are still aiming for a final draft agreement by the end of the year. The participants in the TTIP are still working on their statements of objectives, while the participants in the RCEP are at an even earlier stage of the groundwork for their agreement.

The challenges that would be involved in such a ‘meta-framework’ for negotiations are not trivial. But they are almost certainly less than those faced by the Doha negotiators. The modalities framework need not, after all, be a binding agreement between the framework subscribers. It could be a G20 ‘code of practice’ for the mega-regionals for reference during their negotiations and could be revisited in the light of experience during the mega-regional negotiations. China, the EU, India and the United States would be essential subscribers to the framework but they would not be asked, as they were in the Doha negotiations, to commit to specific outcomes in their mega-regional negotiations. Instead, the framework would signal their intention to, for example, eliminate certain classes of NTMs (export prohibitions and subsidies; all quantitative measures; services restrictions based on nationality…); or to cover certain aspects of competition and investment laws; to favour the recognition of international professional standards; to adopt the same approaches and time-frames for aligning product standards among members of the regional agreement; or to use the same (simplified) approaches to specifying preferential rules of origin.

Governments’ experience in the Doha modalities negotiations (since 2001) would be relevant and perhaps helpful in the development of an inter-regional modalities framework. Many of the considerations and challenges will be familiar. But even if it took a year to develop such a framework – even if the framework were incomplete and ad referendum – it would be worth the effort to send a more positive signal about the future of the non-discriminatory world trading system

Conclusion

G20 member governments should be seriously concerned by signals from the G-2 about the direction of their trade policy during the next few decades that will also see an unprecedented historic transition in global economic ‘mass’. The proposed mega-regional agreements will undermine the value of a key asset in the trading system: the multilateral agreements of the WTO. Most of the G20 will be losers from any weakening of WTO guarantees of non- discriminatory treatment during this period of economic transition.

A declaration by G20 economies participating in the TPP, TTIP, RCEP and EU-Japan mega- regional agreements that they will seek prospectively to align modalities in those agreements for the liberalisation of goods, NTMs and services and, in principle at least, that they will offer these modalities as the basis for future WTO agreements that would be open to accession by other WTO members, would help to maintain a credible future for the non- discriminatory multilateral system.

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Global value chains: implications for trade, investment and development policies

John Ravenhill

Value chains have been the principal engines driving globalisation. Starting in the 1960s, companies increasingly began to move some of their operations offshore, seeking to reduce costs by sourcing components or conducting labour-intensive operations in countries with lower wage rates. This ‘fragmentation’ of the production process was facilitated by three developments: increasing liberalisation of trade and investment regimes; changes in technology that substantially reduced the costs of transporting goods; and the emergence of new business models.

Companies that controlled the various stages of production – from research and development to manufacture to marketing and distribution – were able to concentrate on those stages that were most profitable. Beginning with the athletic footwear industry – the ‘Nike model’ – companies increasingly opted out of the manufacturing process rather than themselves establishing subsidiaries offshore, generating their profits from their control over design, brand name, and distribution. Although they often did not have any equity stake in their suppliers, they provided critical inputs such as the blueprints for products. The electronics industry quickly followed this model, with many of the big-name companies in computing and mobile phones outsourcing their manufacturing. The logic of the business model has been carried furthest in recent years by Apple, which derives its profits from its control over research and development, proprietary technology, brand name, and distribution channels, but contracts other companies to make its products.

The fragmentation of production has dramatically transformed the structure of international trade, integrating developing economies into manufacturing networks. By the middle of the first decade of this century, for instance, manufactures accounted for 85 per cent of the total merchandise exports of developing East Asia and they constituted nearly three-quarters of ASEAN’s exports. International merchandise trade is now increasingly based on vertical specialisation, that is, trade in components that are part of the same product. World trade in components increased substantially in the first decade of the 21^st century, up from 24 per cent of global manufacturing exports in 1992–3 to 54 per cent of the total in 2003.³⁰ In the same period, the share of developing economies in exports produced within value chains doubled, primarily because of growth that occurred in East Asia. In 2007-8, exports within value chains accounted for fully 60 per cent of East Asia’s manufacturing trade, in comparison with a world average of 51 per cent.³¹ The incorporation of China into global value chains has been a major factor in the transformation of international trade: in 2000-2008, China accounted for two-thirds of the world’s processing exports (followed by Mexico with slightly under one-fifth).³² Although typically more difficult to measure, trade in services has become an increasingly significant dimension in the development of value chains.

30 OECD, Moving up the (global) value chain. Policy Brief. July 2007.

31 Yuqing Xing and Neal Detert, How the iPhone widens the United Statestrade deficit with the People’s Republic of China. ADBI Working Paper 257. Tokyo, Asian Development Bank Institute, May 2011.

32 World Trade Organization/IDE-JETRO, Trade patterns and global value chains in East Asia: from trade in goods to trade in tasks. Geneva, WTO, 2012.

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The significance of value chains had long been recognised by economic geographers and theorists of international business. Increasingly, the economics profession has acknowledged that the contemporary structure of international production and trade bears little resemblance to traditional theories of international trade. In turn, the major multilateral economic institutions have become interested in value chains and their implications for policies on trade and development. Global value chains have, in the words of the WTO’s Director-General Pascal Lamy, produced ‘a new paradigm where products are nowadays “Made in the World.”’³³ If, indeed, there is a new paradigm, what are the implications for how we conceive of international trade – and what policy implications for the G20 flow from this reconceptualisation?

‘Made in the World:’ implications for global imbalances

At the Pittsburgh summit, leaders of the G20 agreed to work together to ensure a lasting recovery from the global financial crisis and to establish the foundations for strong and sustainable growth in the medium term. The Framework for Strong, Sustainable and Balanced Growth launched at Pittsburgh is the centrepiece of the Group’s approach. Through the Mutual Assessment Process, the G20 aims to establish growth objectives for the global economy, the policies needed to reach them and (with support from the IMF) mechanisms for assessing progress towards the agreed goals. At the Paris meeting of G20 finance ministers in February 2011, agreement was reached on the indicators that would be monitored as part of the Mutual Assessment Process. One of the indicators that figured prominently was external imbalances ‘composed of the trade balance and net investment income flows and transfers’

(in addition to various indicators of domestic balances such as public debt and fiscal deficits, and private savings and debt).

Trade imbalances have been the indicator that – since the demise of the gold standard in the 1920s – has attracted the most attention from politicians and the media, even though a focus on trade balances, particularly those between pairs of countries, makes little sense from the perspective of economics. Data on the balance of trade are convenient, however, in that they are relatively easily calculated and are seemingly intuitively plausible gauges of whether or not countries are behaving responsibly in their international economic relations. The advent of global value chains, though, has significantly complicated the calculations of trade imbalances.

The most vivid demonstration of the new complexities of international trade balances has come through work that has focused on the geographical distribution of value added in several of Apple’s flagship products. Although these are ostensibly ‘Made in China’ – and for balance of trade purposes, their full value is classed as a ‘Chinese’ export – only a very small portion of the total value of the product is actually added within China. For one iPhone4 assembled in China (by the Taiwanese company Foxconn) and sold in the United States, trade data would indicate a Chinese export valued at $194.04. Slightly over $24 of this figure consists of components sourced from the United States: one iPhone4 consequently would contribute $169.41 to the bilateral US trade deficit with China. However, all of the components for the phone are actually sourced from elsewhere: China’s value added consists only of the labour used in the assembly, a total of only $6.54. When measured on a value-

33 World Trade Organization, 15 years of the Information Technology Agreement: trade, innovation and global production networks. Geneva, WTO, 2012.

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added basis, most of the cost of the iPhone4 import is attributed to other countries, notably Korea (Samsung supplies the display and memory chips for the phone).

Figure one: geographical sources of value added for an iPhone4 (in $US)

Source: OECD (2011)³⁴

Xing and Detert estimate that imports of iPhones alone contributed close to $2 billion to the recorded US trade deficit with China.³⁵ If these imports had been measured in value-added terms, however, the figure would be less than $75 million. The iPhone example is but one dimension of the complications that the spread of global value chains have caused for measuring trade imbalances: again focusing on what is currently the most politically sensitive imbalance, that between China and the United States, the WTO estimated that the overall US trade deficit in China would have been cut by more than 40 per cent in 2008 if it had been measured in value-added terms rather than by conventional national trade statistics.³⁶ But it is not just the US-China trade balance that looks remarkably different when measured in value- added terms: the substantial trade deficit that Korea runs with Japan largely disappears when trade is measured in value added.

One important implication of the growth of value chains therefore is that new measures of international trade are required if sound policies are to be adopted both to identify and to rectify global imbalances – a need recognised by the WTO and OECD in their joint project to

34 Koen De Backer, Global value chains: preliminary evidence and policy issues. OECD, 19 May 2011:

http://www.oecd.org/industry/ind/47945400.pdf.

35 See Table 2 in Xing and Detert, How the iPhone widens the United Statestrade deficit with the People’s Republic of China.

36 See figure 9, p. 104 in: World Trade Organization/IDE-JETRO, Trade patterns and global value chains in East Asia: from trade in goods to trade in tasks.

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produce a database on ‘Trade in Value Added.’³⁷ Value chains also constrain the effectiveness of policy instruments traditionally used to address trade imbalances: with final products being assembled from components sourced from many countries, a change in a bilateral exchange rate, for instance, may have unpredictable effects because it will not only weigh on the domestic content of a country’s exports but will also affect the cost of imported components. Data on value added also have the advantage of avoiding the current problem of double-counting that occurs when components cross borders before assembly into a final product (which leads, for instance, to a substantial overstatement of the overall significance of intra-regional trade in East Asia). Furthermore, measuring trade in value added provides a far more accurate indication of the contribution that services make to international trade.

Trade policy implications of the growing importance of global value chains

Value chains have been at the heart of the conventional wisdom that economic integration in the Asia-Pacific has been ‘market-driven.’ At one level, such arguments are correct – the Asia-Pacific, of course, lacks the supranational regional institutions of Europe. On the other hand, the role of governments in facilitating the growth of value chains should not be overlooked. Their contribution over the last three decades has taken many forms: the establishment of export-processing zones that permitted duty-free import of components for assembly into products that were subsequently exported, zones that were the basis for the early footholds that many countries in the region including China gained in these networks;

similar but non-geographically specific provisions through duty-drawback arrangements; the unilateral lowering of tariffs (important throughout the region from the mid-1980s onwards);

and government commitments in regional and global trading agreements, not least the 1996 Information Technology Agreement (ITA) that freed up a substantial part of trade in the region’s single most important export sector. Specific tariff provisions on the part of countries importing assembled products in some instances have encouraged outsourcing of a number of processes and the import of specific inputs, e.g., the US ‘yarn forward’ rule, which requires the use of US materials if the product is to benefit from US tariff concessions.

Two extremes on the spectrum of policies are evident in responses to the rapid growth in the role of value chains. One is to suggest that the success of value chains is testimony to the effectiveness of current policies – whether unilateral measures by governments or global treaties such as the ITA: nothing more needs to be done. The other extreme is a stark reiteration of the ‘Washington Consensus’ agenda of the 1980s: if countries want to gain the full benefits of participation in global value chains then they should simply liberalise their trade and investment policies and take the state out of the economy as far as possible. Neither of these extremes is particularly helpful.

While it is the case that export-processing zones and similar arrangements have facilitated the participation of developing economies in value chains, the potential gains to the local economy are constrained when participation in networks is confined to geographical enclaves. Better to make the duty-free import of components consistent across the whole economy. And while it is the case that nominal tariffs have fallen dramatically in many developing countries, tariffs can still be significant impediments. The effect of residual tariffs is magnified in a world in which components cross borders, sometimes on multiple occasions (final assemblers, for instance, may pay tariffs on their imported inputs and then face tariffs

37 For an explanation of Trade in value added see OECD, Measuring trade in value added: an OECD-WTO joint initiative. May 2013: http://www.oecd.org/industry/ind/measuringtradeinvalue-addedanoecd- wtojointinitiative.htm.

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on the full value of their exports including these inputs). And while the Information Technology Agreement has frequently been hailed as the single most significant trade liberalisation measure since the WTO came into existence, the sector has developed substantially in the fifteen years since the ITA was signed so that the agreement’s coverage of products in this sector is increasingly incomplete. A strong case can be made for a substantially revised ITA.³⁸

In other words, much can still be done through traditional trade policy agendas to facilitate the operations of global value chains. But efficiency within global value chains also depends heavily on non-tariff barriers that impede the movement of components and goods across borders. Among the most important of these are efficient customs procedures and processing, and standards setting and certification procedures. Here substantial potential exists for mutual recognition or harmonisation of product standards. These are the so-called ‘21^st century’ trade issues that are figuring prominently in current negotiations such as those for the Trans-Pacific Partnership.

Global value chains and investment

The proliferation of global value chains has come at a time of unprecedented levels of foreign direct investment. The relationship between the two is not as straightforward as might appear from a superficial reading, however. Significant numbers of global value chains are associated with little or no foreign direct investment. This characteristic is particularly evident in what are often referred to as ‘buyer-driven’ chains that dominate the textile and apparel industry, for instance. Here the principal contribution of the lead firms to their suppliers is to provide the specifications to which goods are produced (and of course the marketing channels through which the final products are sold). Even in more technologically intensive sectors such as automobiles, the principal contribution of the lead firms in a value chain may be to provide blueprints and often technical assistance to their suppliers, sometimes seconding their engineers to work at their suppliers’ manufacturing plants. No equity relationship is involved.

Other value chains may include foreign direct investment relationships but not those linking the home country of the lead firm and the countries doing the assembly. In the athletic footwear industry, for instance, the investment in Southeast Asia where plants manufacture for leading international brands such as Nike came not from the US company but from Korean and Taiwanese manufacturers. In electronics, much of the foreign direct investment – whether for Apple or for other mobile phone brands such as Nokia – again comes not from the lead firm but from electronic contract manufacturers based outside of Europe and North America. Outside of the industry relatively few people are aware of the scale of these companies: HonHai, whose Foxconn subsidiary assembles most of Apple’s products in China, has grown into the world’s 60th largest company (by revenue), with total sales in 2011 of over US$90 billion, more than 50 per cent above those of Apple, its principal customer.

Although HonHai alone accounts for almost half of the total revenue of contract manufacturers, the industry features other large players including the Singapore-based Flextronics, ranked 334 on the Fortune Global 500, with 2011 sales of US$29 billion.

38 See, for example, Hosuk Lee-Makiyama, Future-proofing world trade in technology: turning the WTO IT Agreement (ITA) into the International Digital Economy Agreement (IDEA). ECIPE Working Paper. Brussels, European Centre for International Political Economy, 2011.